Australia-China relationship on a 'bit of a knife edge'

Australia's growing reliance on selling services to China leaves the economy exposed to geopolitical frictions, as business and national security professionals clash over how to respond to Beijing's rising assertiveness.

Analysis by consulting firm PwC estimates the economy would lose $2.3 billion and 20,000 jobs if Beijing ordered students and tourists to shun Australia for one year, under a "imagine the unimaginable" scenario in retaliation against government criticisms of China.

PwC's Asia practice head Andrew Parker said the Australia-China relationship was on a "bit of a knife edge".

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China is considered highly unlikely to punish bulk mining commodities exported from Australia to construct roads, buildings and bridges, but he said Beijing might in the future target services industries for economic retribution.

Clear warning

Just last month the Chinese Ministry of Education and Chinese Embassy in Canberra warned students to be vigilant about their personal safety in Australia.

"That was a very clear warning to Australia," Mr Parker said.

South Korea's exports dived last year when China announced it would block market access for entertainment, consumer goods and tourism, in response to Seoul announcing it would deploy a US anti-missile defence system.

South Korean retailer Lotte Mart was financially crippled.

"Australian companies who believe they could not fall victim to that kind of situation are incredibly naive," Mr Parker said.

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PwC is a major partner of The Australian Financial Review's Business Summit presented by BHP on Tuesday and Wednesday in Sydney.

The vexing issue of managing relations with China will be debated by business leaders, former Labor foreign minister Bob Carr and retired top defence and intelligence official Dennis Richardson.

Kerry Stokes believes Australian firms enjoy easier access to China's large market because they are not viewed as a threat by state-owned corporations, unlike huge US multinational firms. Philip Gostelow

Summit guest speaker Andrew Shearer, a former national security adviser to prime ministers John Howard and Tony Abbott, said business had to take a longer term view beyond short-term profits.

"Australia can't take a selfish view on the tourism or overseas student market," said Mr Shearer, now a senior adviser on Asia-Pacific Security at the Centre for Strategic and International Studies in Washington.

Mercantilist trade practices

Mr Shearer pointed to China's mercantilist trade practices that had frustrated US President Donald Trump, both major parties in Congress and the American business community. Mr Trump last week flagged global tariffs on steel and aluminium, and is also pursuing Chinese IP theft.

"I don't approve of Trump's tariffs but they are a reaction to something that is real with China ripping off intellectual property and state-subsidised overproduction," Mr Shearer said.

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Business has to take a longer term view beyond short-term profits, says Andrew Shearer. CSIS

"Trump's policies are the implication of that and could have real consequences for Australia.

"Australia is going to have to accept friction in the relationship with China now and push back selectively when China's actions undermine our interests."

Business and the national security establishment in Canberra are increasingly at odds with how to deal with China. Companies are focusing on the $155 billion two-way trade relationship, while intelligence agencies worried about Beijing's misbehaviour in Australia and the region.

Business magnate Kerry Stokes told the Financial Review in Washington last month that Australian firms enjoyed easier access to China's large market because they were not viewed as a threat by state-owned corporations, unlike huge US multinational firms.

"Australia is seen as friendly and containable," Mr Stokes said.

"Australia is an island nation. We rely on trade with China. We rely on America for our security."

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John writes on economic policy and the intersection of politics and business. From August 2013 to June 2018, John was US Correspondent for The Australian Financial Review in Washington. He joined the masthead in 2008 and has covered banking, tax, politics and the economy. John began his career at Treasury as an economic policy analyst. He has worked part-time as a sports broadcaster. Connect with John on Twitter. Email John at jkehoe@afr.com.au